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... It doesn't matter what the "horse race" outcome of the campaign is, if we fight the campaign. Fighting it, we learn how to fight. Learning how to fight political battles, we become citizens again. Becoming citizens again, we reclaim the Republic that lies dormant beneath the bread and circuses of modern American society.

Friday, November 21, 2008

A while ago, as an off-shoot of the Beauty Platform, I set out a Beautiful Bail-Out plan.

Two key parts were: 50:50 on money going to help regular home buyers to extricate themselves from the mortgage meltdown, and on bailing out the finance sector from the mess they got themselves into ...

... and having the finance sector bail out consisting of both unloading dubious assets and issue of Senior Preferred shares with heavy strings attached.

Now, the Administration did not, in fact, listen to me, but when Senator Dodd was complaining about what banks had done with their bail out money, waddya know ... I got a perfect three out of three on what strings needed to be attached to the money:

Limits on Mergers and Acquisition

No payments of any other dividends

Limits on Executive Compensation

... until the Senior Preferred Dividend had been paid for four quarters straight ... and kicking back in if the firm in the future ran into problems meeting the Senior Preferred Dividend.

But ... does the Beautiful Bail Out model extend to the Big Three?

Gosh, if my answer was no, this would be an awfully short essay, wouldn't it?

Why Strike A Deal Anyway

There are four Real World Economics reasons to strike a deal.

(1) The first is that a bankruptcy in the middle of a credit crisis is not the same as a bankruptcy in more normal times. Bankruptcy protection that allows an insolvent firm to continue operating. It can even allow the bankrupt firm to ensure that credit advanced after the bankruptcy moves to the head of the line in case things fall apart.

But in the current state of the finance sector, there is no guarantee that it will be possible for GM or Ford or Chrysler to obtain the funding they need to continue operating while restructuring their debt.

(2) Why are there so many arguing in favor of bankruptcy anyway? Well, going by the record of multiple airline bankruptcies, they are hoping to break the UAW. That is why "let them go bankrupt and then sort it out" is married with "its all the Unions Fault for winning decent pay for their membership".

Except, of course, if it was up to the UAW, the Big Three would not have conceded small cars to overseas competition. The small car sector was conceded precisely because the operating profit margin per car was so low. So the industry downsized, chasing higher operating profit margins per car. But downsizing means that benefits to retired workers are a big burden on each car sold, in large part because the Big Three decided to sell fewer, and on average bigger, cars and cars-classified-as-trucks.

And where did all those benefits come from in the first place? Its not like the UAW dictated the terms ... those came from negotiated contracts, and the terms we heavy in benefits rather than up front pay precisely because the management of the Big Three thought that was the best deal for the upper management.

And the reasoning is straightforward ... there is an overtime penalty in place in the US, to encourage employers to share work around during an upturn, spreading work experience around the population and adding new rungs on the ladder of opportunity. However, the overtime penalty is on the hourly wage. If only 2/3 of the full-time, 40 hours per week pay is in the wage rate, and 1/3 is in the benefits, then an hour of overtime costs exactly the same as an hour of regular time, and the company can duck out on its responsibility to spread the work around during periods of strong demand.

Of course, GM, Ford and Chrysler, when they signed those contracts, did not look decades ahead to worry about the downside ... they are not companies that look decades ahead. But its management that pushed deals toward a heavy dose of benefits ... and Republicans in Congress are now using those deals to blame the Unions for the decisions of management.

(3) Then there's the employment impact. I'm going to repeat it, since it seems like many of the opponents of a bail-out have missed the point, but the Panic of 2008 was the most serious since the Panic of 1929. And now we are sliding into a steep and globalized recession. Even if $25b just pushed the collapse off for a while, turning it into a slow motion process spread over three or four years rather than a sudden jolt, it would be well worth it. Being generically Pro allowing the Big Three to collapse is, in other words, a quite different thing than allowing the Big Three to collapse now.

(4) Finally ... there is the opportunity. While the Big Three have been roadblocks in the way of development of a sustainable, energy independent economy, they also collect together substantial development and production capacity that can be used to promote development of a sustainable, energy independent economy.

This financial crisis in the ownership of these capabilities offers us the opportunity to put hooks in to ReOrient from the past to the future. However, this is a process that will take time ... it would normally take five years to see serious results, and ten years to complete the process.

If we allow the Big Three to collapse now, we squander that opportunity.

And now, the New Deal...

I'll start from the "bail out" side and then move up.

Strings Number One and Two: Limits on Mergers & Acquisitions and on Dividends

This is a one-way limit ... that is, any of the Big Three will be free to sell any operation outside the ones that the bail-out are in fact trying to avoid going belly-up in the middle of a recession and financial crisis ... that is, US based design and production of automobiles and components in particular, and transportation stock in general.

But with the Senior Preferred Shares comes a veto over any Merger or Acquisition activity. And don't be distracted by the argument that the auto companies are not in a position to get involved in M&A activity now ... if the bail-out succeeds, then they will be in a better position in the future. But their shareholders will not get the freedom to play any M&A games without getting the OK from the Senior Preferred shareholder.

The limit on Dividend payments is additional insurance that the corporation will attempt to pay the Senior Preferred dividend if they possibly can ... because dividends will not be able to be paid to common shareholders until the Senior Preferred dividend has been met for four consecutive quarters, and common share dividends will be turned off again if the company cannot meet the Senior Preferred dividend.

String Number Three: Executive Compensation

This is in two parts. Direct executive compensation is limited to 10 times median individual income, and the only deferred executive compensation allowed are stock options maturing five years or more in the future.

This will lead to some of these CEO's quitting. Big fat hairy deal. A situation with the CEO and President making something no much more than the Senior Vice Presidents ... and only becoming filthy rich if they succeed in restoring the business to health, allowing them to cash in on long term stock options ... the executives that are willing to make that deal are the ones we want running the company anyway.

De-leveraging the Big Three

Of course, just a cash infusion and nothing more does not necessarily solve the problem. So just like the proposed financial sector bail-out, the package ties the equity infusion with a restoration of the financial health of the balance sheet.

For the finance sector, the problem was on the assets side ... financial instruments created with fictitious ratings supporting the pretense that they were high grade, high return assets, when in reality they were a pile of high return chicken shit grade assets.

The problem for the auto company is on the liability side. And the Hooverites in Congress (oddly enough, still representing a big wing of the House Republicans) are all over this ... they want a bankruptcy in order to break obligations to the UAW membership working for the Big Three. After decades of give backs and concessions on the basis of the firm's increasingly desperate financial shape, the last step is to stick a knife in the UAW and get rid of them.

What a surprise. I am shocked, shocked, that there is gambling going on in my cas... err, that Reagan Republicans would seize on any excuse to engage in union busting.

But House Republicans are not the majority, so screw them. With Begich, Senate Democrats are at 56, Bernie Sanders makes 57, and Lieberman will likely be laying in wait for a more opportune time to screw the administration ... and on his past record, is likely to do that on foreign policy in any event.

Voinovich cannot afford to vote against whatever bail-out comes out of the House, so there is only one more vote to break a fillibuster, and both Lugar and Spectre are from states with a direct stake in the Big Three not going belly up. Indeed, if the Minnesota recount goes against Colman, we are almost certainly there.

So strike a harder deal than that. For each $1 in equity stake, the auto company issues a warrant to convert $1 in corporate bonds to newly issued common stock. The Treasury buys those bonds, exercises the warrants, and puts the common stock in trust. The votes of the common stock trust are exercised by a trust board consisting of three members elected by the employees of the auto-maker, three members selected by Congress, and a chairman selected by majority vote of the balance of the board.

Note that these are US employees ... if other companies want to bail out a member of the Big Three in return for an equity stake and a big voting block voice at the Annual General Meeting for the employees from their countries, they can go right ahead.

Tuesday, November 11, 2008

It is now well known around the place where I work that I not only, oddly enough, bike to work, but that I do not have a car at all. And so, one of the things that brings a smile to my face when I'm at work is the worried queries how I'll get to work when winter sets in.

I smile because last December I was biking 14 miles up to the warehouse in snow, sometimes feeling like counting my toes when I arrived to make sure they were still there. Given that, a bit under three miles to work this winter is far from daunting. But it is far from the imagination of the small town / exurban Buckeye, who view bikes primarily as fair weather recreational kinds of things.

Now, having gone through it before does not mean that I laugh, LAUGH!, in the face of the Ohio Winter, but rather that I know enough to cope with it.

The first thing is layering. And layering without cotton as the inside or outside layer, because cotton loves water, and water loves to become chilly in winter. From head to toe:

head ... cloth cap, pulled down over ears, rain cover on helmet to make an air layer inside the helmet

torso: ... base layer of some water wicking material, long sleeved shirt, in the coldest weather an outer shirt, and sweater of some water wicking material

hands: ... thin fall season gloves, with winter gloves on the outside (the inner gloves are especially handy if you have to take the outer gloves off to do something)

legs: ... long johns underneath winter slacks

feet: ... warm socks, shoes, and toe wind breakers

One of the first things I learned is completely obvious, but still it took experience for it to sink in. Snow is frozen rain. So when it is snowing, one piece of gear is the same as when it is raining ... a rain cape.

Of course, there are higher tech solutions out there, and if you are a Gore-Tex kind of person, I am not going to try to argue you out of your Gore-Tex Rain Parka as your outer layer. After all, while a rain cape largely solves the air circulation problem by creating a tent within which you ride ... it also creates a tent within which you ride, which can mean more wind resistance. I cope with that by leaving earlier and using a lower gear ... but if you have that wonderful (and expensive) Gore-Tex rain parka and it works for you, then by all means.

If you are going to be riding with a rain cape, rather than a rain suit, then you need fenders. I use the kind without the stays, originally developed to protect mountain bike riders from mud splattering. You will also need a place to put the tail light (even being a fair weather transport cyclist means having a red light, so I'll take that for granted. That is not a problem for me, however, since my tail light is permanently attached to my rear rack, that is not a problem.

Even those who are used to turning around and looking for traffic will find that once you get bundled up, its handy to have a rear view mirror with a good field of view to keep a watch on traffic conditions behind you.

Just like rain gear, a mirror is a matter where tastes will vary. Some will swear by the mirrors that attach to the helmet or glasses, others to mirrors that attach to the handlebars. I personally like the kind shown, partly because the more stuff jutting out from the left hand side of the back, the more cars are likely to respect the bike when passing, in deference to their own car's paint job.

And finally, there is the obligatory hot drink cup. I like the Nissan Stainless, which fits in a bottle cage, twists watertight so it can be tossed into the pannier, and holds heat well. My bike had a second set of points for cage screws on the main tube, so I got a second water bottle cage and put the water bottle in that one.

Friday, November 7, 2008

Well, Modular Pumped Hydro and Bio-Coal, I reckon (and as a reminder, Bio-Coal is charcoal produced from sustainable biomass with modern high efficiency methods inside a sealed vessel ... its not that stuff you dig out of the ground, and it sure as hell ain't your granpappy's charcoal).

And, yes, this is about winning friends and influencing people.

Bio-coal ... the technology is just about ready for prime time, but we do not have the feedstock. Define soil-conserving and soil-building perennial production techniques, make sure that coppice production is in there, and establish strong soil husbandry income to entice Appalachia into coppice wood production.

Unlike subsidies on the product side, soil husbandry payments can explicitly discriminate in favor of production on degraded sites and against any production that involves breaking ground in old-growth forests. It is, indeed, mostly a matter of enforcing the common sense and defending it against nonsense modification.

And corresponding capital subsidies for the establishment of decentralized bio-coal production in areas with depressed labor markets and substantial perennial bio-mass production ... that money will zero in on Appalachia like a laser beam.

Similarly, Appalachia has plenty of the most valuable resource for Modular Pumped Hydro ... that is, Elevation along straight line paths between potential renewable resource exporting regions and strong electricity consumption areas. This can be built into the long-haul HVDC trunk systems, with a feed-in tariff for supply of peak on-demand electricity from storage, and, again, with a capital subsidy for establishment in areas with depressed labor markets.

Now, the thing here is to attack the economic rather than cultural basis of Republican strength in Appalachia as a resource-exporting area, by providing Appalachia with new capacities to export new resources, hinging on the success of the New Energy Economy.

That's the wedge issue here ... converting existing latent renewable resources into actual renewable resources, giving Appalachia growth industries that give them a reason to shift their loyalty to whichever party is more trustworthy as a supporter of expansion of sustainable, renewable energy.

Wednesday, November 5, 2008

Hurray, Senator Obama is now President-Elect Obama.Hurray, John Boccieri is now Congressman-Elect Boccieri.Hurray, Larry Kissell is now Congressman-Elect Kissell.Hurray, What's-is-name in Cincinnati is now Congressman-Elect What's-is-name (I guess I should look that up again)

California passed ... narrowly, but it passed ... Proposition 1A for a High Speed Rail system, including $950m for funding non-HSR systems to connect into the HSR system, helping set up the possibility of leap forward into a more sustainable, more Energy Independent future.

And I'm crying.-------------------------------------------

Well, so sue me.

First is the relief. Instead of Bush's Economic Policy plus Cheney's Foreign Policy in the hands of a Commander in Chief a substantially bit more scary-erratic than either, we have a "center-progressive" ... what they would call in Australia "a safe pair of hands" (its a cricket reference).

Well, maybe a little.

But mostly, there is the one god-damned fly in the ointment ... and to make it even more poignant, from the very same state that brought the hopeful sign of a step toward an Economy with a Future ...

... is the seemingly successful effort to entrench discrimination coming to us as a greasy bit of unpleasant refuse from the Society of the Past.

t's not like I have any close "live world" friends who are gay or lesbian, or family members ... so I don't have the traditional "personal testimonial" to give here. Just sorrow that I live in that country where that is the way that a practiced, slimy theocratic movement can impose their narrow personal morality on society.

I guess what I am grieving is not a death, but an absence ... the absence of a progressive movement that is able to come down on a "Entrench Discrimination for Fund and Profit" ploy like a ton of bricks.

And don't let anybody say "My Country Right Or Wrong" in my presence right now, or somebody is going to end up with broken teeth. Its Our Country, that's why we need to set it right.

Well, unless things go very badly pear shaped, six years to build a movement, fight for progressive policies, build up the progressive bench in state legislatures, primary the worst Democrats of the Corporate wing of the party ... then find a standard bearer to bring a Change Platform and hit the 2016 primary race like a Mack Truck.

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About Me

Obscure Development Economist, living in Ravenna ... though, as the Rubicon is nowhere in sight, its unlikely I will be crossing it anytime soon. Enough about me, tell me about yourself. Or send a tweet @BruceMcF.